Sacramento daily record-union., 1887-08-12

not on its own credit, but upon the in
dorsement OF its paper by its stockholders,
is ready TO commence business. A con-
tract is made and entered into by the rail
road corporation with the Construction
Company, in and by which the Construc-
tion Company agrees to have the line sur
veyed to procure the right of way and to
construct and fully equip the railroad, and
turn it over to the railroad corporation
completely finished and equipped in all
respects as frst-class road, with all neces-
sary adjuncts and conveniences In con-
sideration for this the railroad corporation
agrees to give the Construction Company
the whole Of its capital stock, getting in,
of course, that subscribed by the incor-
porators; and, in addition thereto, agrees
to mortgage its road, franchises and prop
erty, and issue first mortgage six per cent
bonds at the rate of $4,000 per mile, and
deliver the stock and bonds in certain pro-
portions as the work progresses. Without
going through all the details, we will as
sumo that the Construction Company
builds twenty miles of the road and gets
one-fifth OF the stock and bonds. This is
the first time the company has gotten any
thing i'll the shape of money or property
which it can call its own. The stock is,
of course, worth nothing as collateral Sc
curity or as marketable stock The bonds
on an incomplete road can rarely be used
as collateral, and, if used at all, only very
small percentage of the nominal value can
be borrowed on them, as every business
man well knows
But when the road is fully completed
and equipped it is turned over to the rail-
road corporation, at a nominal cost to it of
S4,000, 900 in stock and 100000 in bonds
1t has not, in fact, expended one dollar in
money. The Construction Company has,
however, expended, We will say, 50 2,5OO,-
900, every dollar of which it borrowed from
its stockholders. The only means Of pay
ing this sum are the stock and bonds, which
it has received from the railroad corpora
tion. The earning capacity of the road
has not been tested. The stock has no
value whatever. Tho bonds have an in
trinsic value; for if the railroad corpora
tion makes default, the mortgage can be
foreclosed and the property sold. But the
Construction Company does not wish to
foreclose; its policy is to build up pay
ing business for the road, nurse its securi-
ties and wait until the road has demon
strated its capacity TO pay operating ex-
penses, taxes and interest on the bonds
When it has done this, investors in rail-
road first mortgage bonds will entertain a
proposition to purchase, but before pur-
chasing they invariably investigate and
investigate thoroughly they learn all
about it, how and by whom the railroad
corporation and the construction corpora
tion, the holder of the bonds, were organ
lied, what the road cost and what it earns,
and then if they believe the bonds are a
good investment they purchase them. 1t
makes no difference to these capitalists
that the railroad corporation and the con-
struction corporation are composed Of the
same persons as stockholders. The con-
struction company sells enough of its bonds
| to pay its debts, and if there are any
bonds left, they are divided among its
stockholders as profits. The stock is worth
nothing except for control. 1t may be
that in the course of time the road devel-
ops an earning capacity sufficient to pay
its fixed charges, including its sinking
fund, and leave a surplus to be divided
among the stockholders. Who has been
injured by this method of railroad con-
struction? Not the citizens for they have
paid nothing; neither have they taken
any risks. Not the purchasers of the
bonds, for they bought in the open market,
after full investigation. The idle clamor
that this method has made the road cost
too much, and thereby necessitated high
or exorbitant rates of freights and fares,
ought no longer to be INDUCED in. The
railroad cannot fix its rates for freights or
fares in the State without the consent of
the Railroad Commissioners If engaged
in interstate commerce the rates must be
reasonable, or the Interstate Commerce
Commission will correct the evil.
Our conclusion is that the method of
Senator Stanford and his associates is the
best and least harmful method of railroad
construction yet devised This was the
method adopted to build the Northern
Railway, the San Pablo and Tulare, and
other costly roads, and they have made
them a success without loss or injury to
the State, to any municipal corporation, or
to any stockholder We believe it to be
but an act of justice to these great rail
road builders to lay these facts before the
public.
In hob 4 r